Wednesday, December 24, 2008

Turning Everything on Its Head: A Lesson in Politics and Economics, Part 1

The Conventional Wisdom
Here is what conventional wisdom tells us about the last 30 years of politics and economics:
Democrats generally prefer higher levels of government spending to finance expanded social programs. In order to accomplish this, they raise taxes, particularly on upper income individuals.

Republicans, on the other hand, favor more limited government and lower taxes, believing in the power of free markets to produce the highest level of prosperity for all.

When Ronald Reagan came to office in 1981, he aggressively reduced the size of government and cut taxes, yielding an economic boom. By cutting social programs, he angered Democrats, but Republicans praised his economic policies and believed they lifted all Americans.

George Herbert-Walker Bush came to office 1981 and started to carry on the Democratic legacy, but eventually agreed with congressional Democrats to a big tax increase and was voted out of office.

Bill Clinton then came to the White House and raised taxes again. These tax increases, plus the internet boom put the economy in balance.

After 8 years of Clinton, when George Walker Bush was elected and took office in 2001, he aggressively reduced taxes. Unlike Reagan, however, the economy didn't grow due to the September 11th terror attacks. Because of this economic contraction, we now face a global economic crisis.

Does this sound like the narrative that you have heard for a long time? Me too. The interesting thing is -- most of it isn't true.

The Real Story
Part 1, The Reagan Years
When Ronald Reagan took office, he did pursue aggressive reductions in the top marginal tax rates. However, through the Gramm-Rudman deficit reduction act, he also aggressively pursued closing tax loopholes, especially for upper income earners.

The results? When Reagan left office in 1991, federal taxes a percentage of GDP stood at 18.1%, down just slightly from the 18.8% when he took office (a net reduction of 4% in taxes paid as a percentage of the economy's size.)

Now, you could certainly argue (and I would) that Reagan's policies made the tax code more transparent and efficient by setting real marginal tax rates and reducing complicated tax dodges. What you can't really claim is that Reagan was a big tax-cutter.

Reagan also didn't cut spending. Not at all. Government spending as a percentage of GDP was the same 21.5% when he left office as when he came to office. And this doesn't even tell the whole story -- government spending had increased above 23% of GDP a few years into his administration. It was only at the end that he started to reign in the spend.

What was the result of taxes going down slightly and government spending going up? Higher deficits, obviously.

Reagan certainly prioritized spending differently by focusing more heavily on military investments and less on social programs, but he was clearly no small government guy.

Lots of borrow and spend going on.

Part 2, George H.W. Bush
Bush was not a turncoat tax raiser, as conservatives contended. To the contrary, taxes in total remained fairly stable during his administration, actually falling from 18.1% of GDP to 18.0% of GDP or a 1% tax cut. Sure, he agreed to raise top marginal rates at the end of his administration. But his administration also administered many tax cuts and credits, such as the Earned Income Tax Credit, increases in personal and dependent exemptions, etc.

What Bush did do was spend mone, increasing federal spending from 21.5% of GDP to 22.1% when he left office, a 3% increase.

Increased spending with flat tax revenue continued to increase the deficit.

Part 3, Bill Clinton, Not Your Big Spending Liberal
Bill Clinton came to office and promised to reduce the deficit. And he did. Aggressively. He raised taxes, very true. Taxes during Clinton's 8 years went from 18.0% of GDP when he entered office to 20.9% of GDP when he left, a 16% increase.

He also cut spending in a way that neither Reagan or Bush ever attempted. Federal spending fell from 22.1% of GDP to 18.5% of GDP when he left office, a 16% decrease.

The result was record federal surpluses leading to massive reduction in federal debt. Clinton achieved this in almost equal parts tax increase and spending reduction.

Part 4, George W. Bush, Borrow and Spend Mania
George W. Bush was definitely a tax-cutter's tax-cutter. He reversed almost all of the Clinton tax increases, bringing taxes down from 20.9% of GDP to 18.8% of GDP in the most recent numbers available, a 10% tax cut.

W. also loved to spend money, on prescription drug benefits, the war in Iraq and the TSA. Government spending rose from 18.5% of GDP to 19.9% of GDP, an 8% increase.

The result? Back in the red.

The last 4 presidents had very different styles when it came to taxes and spending.
President Change in Taxes Change in Spending Change in Deficit
Reagan 4% reduction No change 41% increase
First Bush 1% reduction 3% increase 21% increase
Clinton 16% increase 16% reduction >100% decrease
Second Bush 10% decrease 8% increase >100% increase

So, if we measure "conservative" by how much the government spends, Bill Clinton would be the most conservative President of the last 30 years, George W. Bush the most liberal.

If we measure "conservative" by how well they contain the deficit, then Clinton is still the most conservative, W. the most liberal.

It is only by tax policy that you get to the traditional view of Clinton as the more liberal and W. as more conservative.

But is borrowing massive amounts of money to finance tax cuts really conservatism?

Other Quick Takes
Minnesota still isn't decided. Al Franken now leads by 46 votes in the unofficial tally after completion of the recount. But he hasn't won yet. Not by a long shot.

There are still several issues to resolve:
(1) The 1,600 absentee ballots that were improperly rejected on election day. The state supreme court has ruled those ballots should be counted and that the two campaigns should agree to a process for awarding those ballots so the counting can be completed by December 31st. As of yet, no agreement.
(2) The Coleman camp claims some 130 ballots were potentially double-counted during the recount. State law allows for photocopies to be taken of ballots that are damaged and cannot be read by counting machines. In the recount, ballots with duplicates were supposed to be paired with the duplicates to ensure that no ballots were doubled counted. 130 or so ballots were not able to be paired. This could mean ballots were double counted, duplicates were lost or that ballots were incorrectly recorded to have a duplicate. Nobody knows. The State Supreme Court dealt a blow to the Coleman campaign today, ruling that the canvassing board shouldn't attempt to resolve the issue. But it didn't close the door on contesting these ballots -- it said a later court hearing after the election was possible. Which means that Minnesota might certify a winner and we might still have a protracted legal battle.
(3) There are still some discrepancies to resolve in the awarding of withdrawn challenges.

Frankly, #1 is probably the most important. 1,600 votes is a lot with less than a 50 vote margin. But we still have a mighty mess.

It looks like the seat might be vacant when congress convenes January 6th. It does not appear, according to Governor Pawlenty's office that he believes he has the power to name an interim senator. And Harry Reid has made it clear that he doesn't believe such a right exists constitutionally and congress might not seat a replacement pick.

This makes Florida in 2000 look like a day at the park.

Upcoming Blogs
Economics Lessons, Part 2 -- I share my beliefs on taxes, spending and capitalism
Rating George W. Bush -- assessing the successes and failures of the Bush administration

Happy Holidays, everyone!

1 comment:

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